Givaudan：魔法原料 - [Business Breakdowns，EP.242]

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This is Matt Russell, and today we are covering the fragrance and flavor giant Givaudan. My guest is Jeremy Fasnacht, fund manager at Banque de Luxembourg Investments. And we walk through this unseen empire in scent and flavor and how the work that Givaudan does touches so much of our everyday life, how it acts as influential marketing and some of the interesting dynamics that go into this work, how the industry structure has evolved over time, and how Givaudan has been able to capture twenty-five percent market share over a hundred-plus-year history. So this is a fun one. Again, it's a large business that sits in an off-the-radar industry. Please enjoy this breakdown on Givaudan. Jeremy, I'm excited we finally get to break down Givaudan together. Excuse my pronunciation in advance, but this is a business you presented in a very interesting way as a potential breakdown candidate. The more I researched it, the more interested I got. So maybe you can start with the simple introduction, how you would paint the picture of Givaudan to our listener base?

Thanks for having me. First, I'd like to say that it's a special, quite secret, fascinating business. They are based in a city called Vernier by Lake Geneva. They currently have a market cap of 25 billion Swiss francs.

On a typical day, you wake up and go to the bathroom. The floor is clean and smells like lavender. You take a shower, grab your favorite shampoo and gel that you have used every day for years, and brush your teeth with your favorite refreshing toothpaste. You put on your organic deodorant while your partner may be putting on this terribly attractive perfume and magic skin cream.

You put on your shirt to go to work, and it smells of the fresh scent of your laundry detergent. Then you grab a healthy beverage and eat a plant-based yogurt that you have every morning on your way to work. Now, you work a lot, so you're starving. You hesitate between this trendy veggie restaurant with delicious flavors and your regular fast food. Finally, you fall for this yummy burger with an irresistible sauce and your favorite soda.

Now the day is almost finished. You visit the supermarket, and at the checkout, you can't resist the taste of this chocolate bar. In all these products, and tens of thousands of other products around the world, there is a high probability that Givaudan is involved. They are everywhere. They create the magic ingredients—the fragrances and flavors—that influence the senses of humans. These are the main reasons why people love certain products and keep repurchasing them for years.

I am always amazed at the power of scent and taste. Anything around the 5 senses tends to be a good focus area.

Studies show that this comes before advertising, the usefulness of packaging, and price. It's really the main reason—the flavor and fragrance—why people are crazy about some products. Givaudan produces these fragrances and flavors, and what's important is that they are a tiny fraction of the client's cost.

Their employees are artists, scientists, and experts in nature, chemistry, and human emotions. Humans have hundreds of receptors in the body dedicated to smell and taste, and these are linked to our memory, the brain, and our emotions. So Givaudan's products have the critical role of creating and reinforcing the emotional bond between the brands that people love and the consumers.

They are the real innovators behind tons of decades-long successful, world-famous branded products that are sold by the largest usual-suspect multinationals that everybody knows. In home and personal care, you have, for example, P&G, Unilever, Estée Lauder, L'Oréal, Colgate, and Reckitt. In flavors, in food and beverage, you have PepsiCo, Coke, Nestlé, Starbucks, Mondelēz, Mars, Hershey, and lots of famous fast-food chains.

So, as I said, it's a secret industry. These companies don't really want us to know that the big innovation is coming from Givaudan. Givaudan does even more business with tons of local and regional leaders, disruptive startups, and small indie brands around the world, which are growing much faster on average.

In the end, hundreds of millions, if not billions, of people are enjoying Givaudan's creations every single day, but they don't know that it comes from Givaudan. That's crazy. The business provides strong visibility and growth, strong and stable cash flows, and a nice return on capital, thanks to the value they provide in the end markets.

The industry is like staples, but better. It seems that most investors don't really know the name, but Givaudan is still a very nice business: defensive, recurring growth, and attractive cash flows. The industry is more diversified, and you benefit from lots of trends. It just seems better by construction.

I'd be curious to know. It's such a fascinating market and industry, and it makes sense to me. I just think about going onto a boardwalk, where the odor of the funnel cake is its own attraction and stronger than any marketing you could ever come up with in terms of packaging or visual aesthetics.

Can you get into both the history of Givaudan, their exposure to this particular industry, and how much they pioneered or disrupted it over time? I'd be curious to know how their story fits into that.

Givaudan was founded a long time ago, in 1895 in Zurich, by two brothers, Léon and Xavier Givaudan. At the beginning, it was a perfume factory. There's a small story: a few years later, the local bakery complained because the factory fumes made the bread smell like violet. So they were forced to move, and they went to Vernier.

They were really pioneers in creating synthetic perfume in large quantities because, at the time, there were only small boutiques and craftsmen. They really got into synthetics. It's funny because now it's exactly the opposite: everybody is going into naturals. But at the time, it was revolutionary.

At the beginning, it was perfume. Then they moved into flavor with an acquisition. In 1948, they bought Ersolko to get into flavor. Then, in the 1960s, the famous pharmaceutical company Roche wanted to diversify, so they acquired Givaudan, as well as another company, Roure, a French company that is legendary in luxury perfumes and naturals. It was based in Grasse, the cradle of perfumery in Provence.

Roche merged the 2 companies in the 1990s, and then, in 2000, Givaudan was spun off and listed on the Swiss exchange. They really became the dominant player by acquiring Nestlé's food ingredients business in the early 2000s and, later, Quest International, which was part of Unilever. These companies were outsourcing this complex business.

Now it's also a bit funny because it's the opposite: some companies, like Unilever and P&G, are trying to get back into it by investing in fragrance capabilities. With all that and other bolt-on acquisitions, they are today the leader of this industry. Their revenues are equally split between flavors and fragrances.

It makes sense to me. Obviously, fragrance has an impact on taste. Anytime you restrict your ability to smell and taste something, there's overlap. But in terms of how these teams operate, you mentioned they moved into flavor with an acquisition. Do those teams and divisions operate very separately?

They operate separately, but on the other hand, there are lots of things that are common. If you want to succeed in the industry, you have to get big. You need scale. You need global and local operations. You need tons of R&D and IP. You need trade secrets and deep pockets. You need lots of relationships and trust from clients. You have to navigate a complex regulatory environment that is different in each country and region.

You have to manage a vast portfolio of thousands of raw materials and sophisticated global supply chains. This is the same for both businesses. The client issues what they call a brief to explain the product they want to create. They describe the brand, the identity, the positioning, the image, the colors, and maybe the feelings they want to associate with the products, and they give a given price.

So this is the same for both businesses. For example, “Hello, Givaudan. This is L’Oréal. We want to create a new luxury Creed perfume for women. We need a fragrance, something smooth and complex with pineapple, jasmine, and bergamot, and we need it for $150 per kilo.” Or, “Hello, I’m the founder of a startup, Madvita. I want to create the best premium organic tea. I need a delicious hibiscus flavor that tastes fresh, natural, and healthy. I want it for $5 per kilo.” So it’s a bit the same in both cases.

What is special is that you have the core list. Most of the large, and some mid-sized, food and beverage and household and personal care companies work with core-list systems. It’s the list of their very few selected suppliers for several years, where you usually find the biggest F&F players like Givaudan. They are guaranteed to be included in all the briefs, but then they are also in competition. You have 3 or 4 companies, maybe, on the list. It’s a very selective club. You have to pay thousands of dollars just to play. The barrier to entry in the industry is, of course, very high.

Now, if you go back to the 2 creation examples, you have the perfumer—the nez, which means “the nose” in French—or the flavorist from the F&F company. They are artists, but also scientists, because it’s very complex. The companies have thousands of employees, but the big companies have only a few thousand of these star flavorists and perfumers. They are generously paid. You also have evaluators who help them, chemists, and food technologists who create a complete product so the clients can really imagine what it would be.

It’s very complex because even for a simple flavor—for example, apple—it must fit the product and the specifics of the brief in terms of flavor. Which variety of apple is it? Is it the flavor of a fresh, ripe apple? What format do you need—liquid or powder? You have to be careful with chemical stability. It must fit with the brand and the regulations, and there are tons of unique variations. Sometimes it must mask other ingredients, and you have to be careful because even if you change 1% of a formula, it can change a lot of things—not only the scent, but also the texture or the stability.

It certainly sounds like the chemistry is incredibly important on both sides of the business.

You have deep integration and a symbiotic relationship with the F&F companies and the clients. It’s often a partnership and a cooperation process. You have the product manager and the marketing people from the client, and you have tons of iterations between both sides. Sometimes, for a simple, small client, it can last a few weeks or a few months, but for a high-end perfume, it can last 2 or 3 years.

The big players have trusted relationships, often built over decades. It’s really secret, so they don’t say that a lot of innovation comes from these companies. They provide the creation, as we’ve seen, but they also advise and support clients in pre-creation. They can do internal testing for the client. They can do market and trend analysis. They have a ton of data. They can do consumer panel testing, and they can advise on regulatory or marketing issues.

The company then creates a unique compound with a unique reference number for a unique client. It won’t be used again with other clients. The IP on these products stays within the F&F company. You see that this is very far from being commoditized. We heard from an industry expert that sometimes an F&F company cannot replicate the flavor or fragrance of a peer despite having the formula, so it’s really complex.

That’s why you see that these F&F companies invest 7% or 8% of sales in R&D. If you look at HPC and food and beverage, it’s only 2% to 3%. But it’s also different by client. For example, you have a lot of clients that don’t have very big capabilities, but you have, as I said, P&G. They have some internal fragrance capabilities. Or maybe you have a Chanel. They have their own perfumer, so they will only buy the raw material.

The F&F companies do all the creation work for free, so that’s why they keep the IP. They submit their creation with all the specificities, and then the client, in the end, tests it with many end consumers. Then they choose 1 of the submissions from the F&F companies and award the business to one of them, which will start production and start making money. It’s a bit like a royalty business, where you have an upfront cost but then you have optionality on the successful products, which might become a cash cow for many years.

My assumption would be that once they win a proposal, so long as that product stays in service—for example, if they win an applesauce proposal for F&F—as long as that product stays on shelves and is selling, I assume that they continue to reap the benefits. You don’t see any changes to the formula after that?

That’s another very critical and nice point about the industry: once you have, for example, a client with a very famous red soda or blue soda selling for decades with the same taste everywhere in the world, selling billions, or a specialty coffee from a Swiss company, or a wonderful ice cream that you eat on your sofa every night, once you have a cash cow, a billion-dollar product like this, the switching costs are enormous.

If you change 1%, you have no reward or incentive to save a tiny fraction of your costs by changing a formula. That’s why you have cash-cow businesses. Even if you look at small clients, lollipops, or some smaller, high-growth business, if you are relying on 1 or a few products that are small but high-growth, but are very important to you, you also have no incentive. You don’t take the risk of changing because it’s too risky.

Even before you talk about brand perception, you have safety and health failures. Why would you go to an untrusted supplier? That’s why it’s a very sticky business. Something else that’s important is that in the flavor business, the cost of the flavor that the F&F company provides is maybe just 1% of the client’s cost. Even in the fragrance business, it’s just 5% of the client’s cost. So you have no incentive to change.

On the other hand, you have the procurement teams of the clients, which, according to the experts we heard from, are constantly trying to get rebates on this. Sometimes you have contracts to maintain the price, and sometimes you don’t have a contract. But when you have significant inflation in raw materials, the F&F company has to negotiate to try to pass it on to the clients. That’s another negotiation between them.

Can you give me a sense of the size of the F&F market? You mentioned they’re the market leader. How big is this? I can probably back out the math based on what percentage of it is food and beverage versus fragrance, but I’d be curious to know the general size of the market and how much it’s growing over time. Any type of trend around the market size would be interesting as well.

The segments where Givaudan is active are mostly customized and tailored products, not basic commodities. In flavor, if you take the entire market, it’s roughly 30 billion Swiss francs. In fragrance, the fragrance and beauty market is around 25 billion Swiss francs. Again, that includes all the clients we mentioned, plus local, regional, and independent brands.

The market share is a bit different between fragrance and flavors. In fragrance, there’s the Big 4. You have Givaudan, another Swiss company called Firmenich, which was acquired by DSM a few years ago, and the U.S.-based IFF. Then, a bit smaller, you have the German company Symrise. These are the Big 4 players.

Then it goes much lower in terms of sales. You have, for example, 2 French companies. One is private and is called MANE. Both companies are based in Provence. You have another great listed business, founded in 1850, called Robertet. They have a very nice niche in raw materials. These 2 are much smaller, and then you have a lot of small players. But the Big 4 control something like two-thirds of the fragrance market, and it’s been very stable for decades.

In flavors, it’s more fragmented. Around the world, the biggest players have something like 10% market share. The players have been almost the same for decades. What’s interesting is that the competition, in general, is more like a golf contest than a Krav Maga fight, for example. The players are rational. Sometimes they even sell specific ingredients to each other. They’re not competing aggressively on price. They’re really competing on innovation.

Sometimes it forces you not to become complacent. In some industries, when you have recurring growth, it’s too easy and you stop innovating. That’s not the case in this industry. In terms of market growth, as you asked, the end markets are mainly defensive, as we have seen, with high-frequency, repeatable, small-ticket transactions, so they’re stable.

From all the figures that we found, the industry is estimated to grow constantly at 4% to 5% per year. If you dig into Givaudan’s IPO prospectus from 2000 and check the market figures from that time, you can calculate that the CAGR has really been 5% per year up to today. Typically, F&F companies have revenue churn—the business you lose because consumers’ tastes change, because a product disappears, or because of competition.

So it means you have 10% that disappears, roughly. If you want to achieve 5% growth, it means that you have to create 15% new products and new creations every year. For example, Givaudan is selling tens of thousands of products, and you have to win briefs and create thousands of new products each year. It’s really an innovation machine.

The churn rate is much higher for a trendy perfume or small startups, where lots of them don’t succeed, than for a billion-dollar ready-to-drink company, logically. If you look at the growth rate—this 4% or 5%—below the surface, there are very different things to know, because emerging-market countries are growing on average 4 times faster than developed countries. Over the last decade, it was around 2% for mature markets and roughly 8% for the high-growth countries. Local and regional players are growing on average 3 to 4 times faster. That’s really driving the growth.

Yes. I would imagine that population growth and general growth of consumption is a big piece of this. But what would you say are the underlying growth drivers of that broader number?

You have tons of growth drivers in the industry in general. They benefit from population growth and more consumers. They benefit from urbanization, with people moving into towns and changing the way they consume. You have rising disposable income in emerging markets. You have lots of trends like natural and sustainable sourcing, better-for-you products, and the multiplication of indie brands.

If you go into flavor, people want less sugar, less fat, and less salt, but they don’t want to sacrifice the taste they love. They want healthier food and beverages, protein, and dairy alternatives. You have to improve the appearance, improve the taste, mask ingredients, and improve the texture. There is also the trend in the U.S. toward natural colors to replace artificial dyes. The market is expected to grow 10% in the next 5 years.

If you go into fragrance and beauty, it’s a bit the same. People want fewer ingredients and better ingredients, but they want exactly the same effects and smell. You need to improve, for example, the scent-to-carbon ratio. You need to improve the scent-to-volume ratio. There is a trend toward people wanting more juice in the bottle, so more fragrance concentration.

You have younger generations that are more interested in fragrance. They are trying lots of products. There is also the impact of social networks and TikTok influencers driving growth. You have encapsulation technology, which is the way that fragrance is released, and it must last longer and be more biodegradable.

You have premiumization. You have people who are savvier and want more active ingredients in their skin cream. You have population aging. Older people have more purchasing power, and they consume more beauty and health products. So you have tons of drivers, and I think it was Mark Twain who said during the gold rush, “It’s a good time to be in the pick-and-shovel business.” The big and most diversified F&F companies can benefit from all these trends without being too exposed to one specific segment.

Relative to the other 3 in the Big 4, what would you say is differentiated about Givaudan’s approach, if anything?

They are the global leader in fragrances. They have around 25% global market share in fine fragrances. They are very strong in prestige and haute perfumery. They have also increased their market share because they have had very strong growth over the last few years. Organically, they have doubled their fine-fragrance business since 2019, so they are very strong.

They are also a very strong global player in consumer fragrances, such as shampoo, soap, floor cleaner, and laundry detergent. They have roughly 20% market share worldwide. They are really the leader in that part of the market. They are smaller in Active Beauty, and they have low-single-digit exposure to commoditized fragrance ingredients. They are the leader, and the company closest to them, as we mentioned, is Firmenich, followed by IFF and Symrise.

In the other division, Taste & Wellbeing, or flavor, they are also a top player, but the market is more fragmented. They have maybe 10% to 15% market share in the flavor market, particularly in the most customized businesses, not the very basic, low-margin businesses. They are really a leader in innovation. They own tons of IP, and they have spent 3 billion Swiss francs over the last few years in R&D. That’s 8% of sales, more than the competition.

They own 5,000 patents. They have 60 research and creation centers worldwide, in Brazil, Mexico, Eastern Europe, and South Africa, so they have local data on consumers. They have insights, and they can anticipate what is happening in terms of consumer trends. They have a big team that is chasing and screening hundreds of startups.

They were pioneers in opening a perfumery school in 1946. Most of the best perfumers went to the school. They have tons of PhDs, and they have 200 noses. They have some stars. For example, Calice Becker created Dior’s iconic J’adore, and she is now head of the perfumery school.

They also have very nice and interesting innovations. They have partnerships with academic institutions. They do some crazy stuff in encapsulation, which is the way to release fragrance. For example, it’s different in Mexico if you’re putting your laundry out to dry in the sun. The fragrance must be released through the impact of the sun. It’s different if you are in the U.K. and it’s rainy, so you put your laundry inside. The fragrance must be released differently.

You have blue color, for example, which is very hard to find in nature, so they make it from spirulina. They are very strong in plant-based meat, sausages, and burgers. What’s also important is that they have a very strong global footprint. They are in 80 production sites worldwide.

They were pioneers 100 years ago in France and the U.S. They went into Latin America 8 decades ago, India maybe 50 years ago, and China several decades ago. In the industry, you need production scale. You need to be able to produce big quantities locally and reliably.

A critical point is access to raw materials. To have nice creations from your flavorists and perfumers, you need to be able to access lots of molecules. They have a big library in their innovation center in Zurich. They have long-lasting relationships that give them access to scarcer raw materials. On the other hand, you need to manage tons of raw materials. They have 3,000 suppliers, so you need a lot of know-how. They have a very dominant position.

Is it right to think about Fragrance & Beauty and Taste & Wellbeing as having some overlap in terms of customer base? You mentioned that proposal before, which would have included both angles of fragrance and flavor. Is it right to think that, with some of these, they might have some overlap in terms of customer base, and when they make proposals, they’re winning the deal for both businesses?

I think if you take a company like Unilever, now they are splitting their food business, but for decades they were in both foods and HPC, so there is a high probability that there are clients in both, for example.

You mentioned some of the margin differences that exist, but just at a high level, Fragrance & Beauty versus Taste & Wellbeing, is there a drastic difference in the margin profile of those 2 businesses?

The decade before COVID, the EBITDA margin was around 22% in both divisions. But now you have Taste & Wellbeing, which is stable at roughly 22%, while Fragrance & Beauty is improving to 27%. That is very likely due to operating leverage and mix, because of the strong growth of fine fragrances over the last few years and the operating leverage.

On margins, they don’t disclose this, but from the information you get from experts, it seems that the highest margins are in fine fragrances, followed by consumer fragrances and then ingredients. In Taste & Wellbeing, they don’t publish the breakdown, but from the information we found, the margins are higher in beverages than in food.

Another difference in terms of inputs is that natural raw materials are much more prevalent in Taste & Wellbeing. They account for around 70% of inputs there, versus roughly 30% in Fragrance & Beauty. Of course, you put more natural raw materials in what you eat and drink, and there is not really a financial logic to putting a high-end, high-quality, expensive lavender extract in your floor cleaner, for example.

If we take it down into the financials a little bit, you mentioned that market growth rate of around 4% to 5%, which has been the trend line since the IPO, and for the outlook, I would say that’s what it hints at as well. Does the business differ drastically from the market growth? Are they growing above that as they grow market share? Talk a little bit about the revenue line and how that tends to trend.

The organic growth in the 2 decades before COVID was 5%, and now post-COVID, if you include COVID, it’s like 6%, a bit higher. Over the last few years, they have been doing a bit better than most competitors. In a typical year, if you break down the growth, it’s typically 4% volume and 1% pricing.

Pricing is used to offset raw-material costs by passing them on to clients, but it’s not really a way to grow. They want to grow through innovation and volumes. What’s interesting is that since the IPO, they didn’t have a single year of negative organic growth. In 2008, 2009, and 2020, they were positive, so it’s very attractive.

If you look at the financials, you also have to be careful because you have to keep in mind that the Swiss franc has been strengthening constantly for decades, so that has an impact.

There is also a bit of a natural hedge because they have lots of costs that are local. I think they have 60 creation centers around the world to adapt to local tastes and cultures, and 80 production centers, so they have costs spread around the world and very few in Switzerland. In terms of margin, as we said, the margin in Fragrance & Beauty is really improving, to 27 percent. Even if they say that their sweet spot is 22–24 percent, that's what they promise. You don't have to be too profitable. You have to invest for growth.

You mentioned the operating leverage. Oftentimes, that can work on the way up, but operating leverage on the way down can be painful. My sense is that organic growth historically has shown not much cyclicality, particularly across different macro environments, because since 2000, we've had actual recessions and down cycles. Have the margins shown more cyclicality than the revenue line?

They are very good at maintaining margins. Something important for them is that when you have inflation in raw materials, like in 2011 or 2022, Givaudan has been pretty good—maybe best in class—at negotiating, perhaps thanks to their size and the value they bring, and at passing the cost to clients. Typically, it's done in 12 months. The cash flow is very strong over time, even in difficult periods. You had an impact on cash flow, for example, in 2022, when you had supply-chain problems and a spike in raw materials, but it's still very high cash generation during a recession.

And I assume that the R&D is mostly shown on the income statement, so that's captured in the margins. It's not capitalized.

Yes. They do 7.5 billion Swiss francs in sales. They have something like 4.2 billion in cost of goods sold, mainly raw materials, which is the topic. Energy represents a small part of the input basket, at 2–3 percent. You get a gross margin of 44 percent. R&D is where they have the highest spending in the industry. They are at 8 percent of sales.

Then they spend 13 percent on selling, marketing, distribution, a few administrative expenses, and operating expenses, and you still have an 18–19 percent operating margin. The cash generation is very strong. You have a cash flow margin of 18 percent of sales, so around 1.5 billion Swiss francs a year. Working capital is around 20 percent of sales, and D&A is around 5 percent.

You have CapEx, typically 300 million Swiss francs, or just 3–4 percent of sales. It splits equally between maintenance, IT spending, and growth. So you have free cash flow above 1 billion. You have a target of 12 percent over the cycle. We like the very long-term approach they have. They don't give yearly guidance. They have a 5-year plan for organic growth, and they talk about CAGR. The free cash flow margin must be above 12 percent of sales. So it's in line with net income, or most of the time it's even above.

You mentioned working capital is 20 percent of revenue?

Yeah.

I can understand why. It's a fairly high number, but it's an interesting data point. On the cash generation, what do they do with the excess cash? Talk a little bit about their framework. I know they've historically had some acquisitions. It's a very long history, so it's hard to say. M&A is a huge piece of it, but how do you frame their capital allocation and using that excess cash, whether it's for shareholder returns or whatever it might be?

The big acquisitions actually happened a long time ago. Now they are doing more bolt-on acquisitions, so they are spending a few hundred million a year on bolt-on acquisitions. They are trying to get adjacent growth opportunities, new technology, access to new raw materials, and new clients. They are not doing a big transformative acquisition.

They are spending half of the free cash flow on dividends. They have a good track record of increasing the dividend steadily, whatever the environment. Over the last few years, they paid down their debts, and they are now at 2–3 times EBITDA. The dividend is covered two times, so it's attractive.

Taking it down into just a general framework on valuation—not necessarily looking for a price target or anything—but how would you say the market tends to value this business, whether it's an earnings multiple or a free cash flow multiple? Do you have any general sense of the framework used by the market and anything you would add to it?

If you look at EV to free cash flow, Givaudan has traded most of the time at 30 times or even more, thanks to the quality, and it was at a premium compared to the global equity index. Even if you compare it to defensive sectors like its end markets—HPC or food products—it was above them.

But today you have quite an interesting situation where, despite strong quality and recurring growth, they are now trading at something like 23 times free cash flow. So you have a 4.3 percent free cash flow yield, which is close to those sectors. It's well below the global index now.

What we like to do is a reverse DCF. You try to have an idea of what's implied in the market in terms of free cash flow growth. Currently, it's only around 3 percent implied growth in free cash flow, so it's clearly below what I think the business is able to produce.

A lot of people look at the dividend yield on this company. You currently have 3.3 percent. It did not happen for a decade. It's well covered by the free cash flow, as we've seen, and it's also well above the global index if you look at it very simply.

In terms of risks, I can imagine some of them. You will have competition over time, and there could be particular emerging-market trends, but what would you point to as the key risks for this business?

You now have a bit of change in management, following the retirement of Gilles Andrier, the iconic CEO for 2 decades. You also had Tom Hallam, the CFO for many years, who left a few years ago. They both did a great job investing for growth over the long term, not doing M&A for the sake of doing M&A and getting bigger. They had a very transparent, long-term view.

There is a new CEO and CFO, and the CFO came 2 years ago. He has 15 years of experience in finance at Givaudan. At the beginning of March, you have a new CEO. He has experience at Unilever and P&G, and 2 decades at Danone in a general management position. That's the main risk.

My father taught me something when I was young. It was something from his mechanics course. The teacher used to say, “You should never touch an engine that's running smoothly and perfectly.”

That's a problem for lots of quality companies. There is new management. They don't understand that it's a wonderful business already, and you have to invest to not be complacent, but don't change everything to change something. The ex-CEO, Gilles Andrier, stays on as chairman and still owns lots of shares. So we hope that everything stays the same.

Otherwise, a few years ago, in 2023, I think, there was an antitrust investigation against several players from the fragrance industry. Givaudan said they were collaborating, and they've made no provision. So let's see if something comes out.

You have some Chinese price competition in the more commoditized fragrance-ingredients part, but it's only 6–7 percent of group sales, I think. That's very different, as we've seen earlier, from the rest of the business, which is deeply tailored compounding with huge barriers to entry and competitive advantages.

Of course, maybe a more short-term risk is the effect of the Middle East war. The region in total is maybe 7–8 percent of group sales, but it was a good growth driver over the last few years in fragrances. In general, fine fragrances are more volatile than the other very stable end markets, and it's now 11 percent of group sales.

Maybe finally, if you're a bit paranoid, a more remote risk would be AI chips implanted in your brain that could simulate taste and scent. We never know. But personally, I will never trade the experience of my favorite ice cream or drink with Givaudan flavors for a chip in my brain.

I think you shared a good lesson in that last answer, but we always close out these conversations with the lessons you could take away. This is a unique business, but what would you say at a high level is a broad takeaway that you might be able to take from whatever classification or framework you would put around this business and potentially apply elsewhere?

If you look at why this business is very attractive, the reason is the business model of selling something very critical to the clients, which represents a tiny portion of their clients' costs. So you have nice margins and a recurring business that they don't want to change. You have visibility.

I think if you look at it this way, it helps you find a lot of good companies in other industries. If you look at this industry, you realize that there are lots of companies that have been growing and thriving for decades, sometimes over a century. If you look at an industry where you see that kind of business—profitable, stable, very lasting—they have gone through many wars and many crises, and they are still there.

You can find other companies in other industries. For example, if you look at food, you have Mars and Ferrero, which are very big companies, and they are able to stay private and still be very important. You have Chanel or Rolex in luxury. It helps you find other potentially attractive listed opportunities.

I love that. It's a lesson we love, and we've seen it in a few different industries that look very different from this, but with the same general concept. Jeremie, this has been a pleasure. You taught me a lot about a market I knew very little about, so thank you for sharing the knowledge with us.

Thank you very much.

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